What Happens if an Individual Refuses to Pay a Promissory Note?

People sign promissory notes to take on different types of debt. The type of debt you acquired when you signed the promissory note will determine what happens when you default on the loan you promised to repay. Different lenders impose different penalties. The consequences of refusing to pay the promissory note are spelled out in the terms of the note.

Tip

The terms of your loan agreement or promissory note will explain the specific implications of nonpayment.

Purpose of Promissory Note

An individual may sign a promissory note when she wants to make a purchase but does not have the cash to pay for the item. Consumers also sign promissory notes when they need to borrow money. The promissory note may explain the terms and conditions of the loan. When the terms and conditions are too lengthy to include on the promissory note, the lender will provide these terms and conditions in a separate loan agreement.

Terms of Default

The promissory note should detail the process by which you will repay the loan. It may include the amount of the required payment and the number of payments expected over a certain period. The promissory note will also include events that will constitute default. Generally, nonpayment constitutes default, but often minor deviations from the terms of the contract will also constitute default.

When you default on the loan, any number of things can happen, depending on the type of loan. To determine what happens if you don’t pay, read the terms of your promissory note or the loan agreement.

Default on Secured Debt

If you have secured debt, you signed an agreement saying that your lender can take your property if you refuse to pay under the terms of the promissory note. For example, say you purchased a car with financing from the car dealership. If you do not pay under the terms of the promissory note, the dealership has the right to send someone to repossess the car. In addition, your credit report will also take a hit.

If the dealership resells the car for less than the amount you still owe on the vehicle, the dealership could obtain a deficiency judgment against you. In that case, you would still owe money on a vehicle you no longer have.

Default on Unsecured Debt

If you default on an unsecured debt, the lender cannot take any collateral from you. The lender can, however, go through different avenues to try to obtain payment from you.

Let's use student loans as an example. If you refuse to repay the student loan as agreed under the promissory note, your credit will suffer. Because you owe money to the federal government, your lender can also garnish your wages and withhold any tax refunds you may have. Default could also prevent you from obtaining additional student loans.

An unsecured lender not connected to the federal government may sue you. If the lender obtains a judgment against you, the lender could garnish your wages and/or bank account to get the money it is owed.

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About the Author

August Jackson is a contributor to various websites. She has taken courses in copywriting and has worked in corporate America as a proofreader. Jackson holds a Bachelor of Arts in English and a Juris Doctor with an emphasis in bankruptcy law.